Is it possible to make money from forex? It sure is. I’ve put together this guide with what I believe to be the best strategies for making money using forex.
I’ve been using forex to make money for the past 8 years. Mainly through copytrading, but also by opening trades on my own.
The concept of forex trading is simply to exchange one currency for another. You do so expecting the price to change and in doing so, you’ll make a profit. However actually making money doing this can be a little bit trickier. The best place to start is understanding on the forex lingo that you’ll come across:
An introduction to forex terms
Forex is quoted using a currency pair. For example GBP/USD.
Why? Because whenever you make a forex trade you are simultaneously buying one currency and selling another.
So take the GBP/USD example; the first currency (GBP) is known as the base currency and the second (USD) is the quote currency.
Long and Short
You can both trade “long” and “short” positions in forex. A long position is also known as a Buy position. You would open a buy position if you thought the currency pair was going to increase in value.
If on the other hand you thought the pair will decrease in value you would open a short or sell position.
Forex pairs are quoted with two prices. The bid and the ask, and the difference between them is known as the spread. This spread is usually how brokers make their money. I find the best way to understand the mechanics behind the bid and ask works is to open a couple of practice trades.
How to know when to open a trade
So how do you know when you should buy or sell a currency pair? Well there is no easy answer, but it’s a good idea to understand how fundamental analysis works. Basically fundamental analysis is looking at economic factors to try and predict if a forex pair will rise or fall.
Let me give you an example. Say you want to trade the GBP/USD pair:
If you were looking to buy this pair, then you would believe that the British economy will do better than it currently is. In general, news that is positive for the brit economy would cause this pair to rise.
Alternatively if you were looking to sell this pair, then you would look for news that the Brit economy will perform worse than it currently is.
But with this pair you also need to take into consideration the quote currency the USD. So for example, if the U.S economy performs well, then this pair may drop in value.
How to stay on top of market news
Trying to stay on top of all the economic news is hard work. But in 2017 there are a few things you should definitely be paying attention to:
Brexit is going to be a huge driving force behind the GBP/USD pair. The Trump presidency will have a big impact on any USD pair. So if you follow just two news stories, then these two are probably the most important.
But for all the other news then I suggest you take advantage of the free daily market reports that many outlets provide. My favorite resource for bite sized snippets of market news is the etoro daily reports.
Practice Trade for Success
If you’ve never traded forex before, then you definitely shouldn’t start with a real account, unless you are copy trading (more on that below).
Pretty much every broker offers a practice account for free. You can trade using this account as if you were using real money, but in fact your just trading with demo money.
Until you’ve developed a solid strategy for trading forex that delivers good results week in week out, in a practice account, you shouldn’t try trading with real money. One of the biggest mistakes people make is making one or two trades in a practice account and thing they are ready to trade for real. This is just a quick way to lose all your money.
So do yourself a favour and sign up for a free practice account. I recommend this one as you’ll also be able to practice trade stocks and commodities (like gold etc).
Why you should copytrade
As a beginner, I don’t recommend trading on your own. Why? Because forex can be extremely volatile and it takes a lot of work to understand the fundamental forces that move forex markets.
CopyTrading allows you to trade forex without having to be an expert trader. The idea is simple, you “copy” a a guru trader, and whenever they make a trade, you do to. This process is handled automatically when you use a copytrading broker such as etoro.
Copytrading reduces some of the risk of forex and allows you to start making money without having to undergo a big forex education. Make sure you read my 2017 guide to copy trading.
How to avoid losing money
All traders lose money on forex. The trick is to minimize your losses. So hear are some tips I like to give beginner traders:
- Use a Reputable Broker: This the easiest thing to do – make sure you don’t sign up with a dodgy broker. The ones I recommend below have been around for ages and I’ve used them personally.
- Start with a practice account.
- Don’t rely too much on charts. Charts can be misleading. Fundamental forces will always have more of an impact then technical factors. So although charts are a great tool, don’t rely on them as your sole source of information.
- Don’t use too much leverage. When used properly, leverage is great, but it could also cause you to wipe away your trading account. Start with a smaller level of leverage to avoid huge losses.
- Don’t close out winning trades too early. This is one mistake I see new traders make. They lose confidence and close out winning trades too early. The problem with this is they also rarely close out losing trades early, believing they will turn around. So although you may be making more winning trades, the shear size of your losses is causing your account to go backwards.
How to choose a broker
Choosing the right broker is essential for beginners. There are three brokers I recommend and I’ll explain why here:
eToro – The best beginners choice
eToro offers in my opinion the best interface for new traders. You can also take advantage of the “copytrading” features which will help reduce risk and is great for beginners. eToro offers forex, stocks and commodities so you’ll have a huge range of markets to trade in.
EasyMarkets – a good alternative to etoro
There are no copytrading features, but EasyMarkets do offer a feature to insure against losing trades. So if you’re after an alternative than this is a safer choice than most other brokers. The interface is nowhere near as nice as etoro but still fairly good.
XM – a good MT4 choice
If you’ve tried out the other brokers and have moved beyond the beginner stage, XM is a good choice. They offer the MT4 trading platform as well as a $1 million competition for pro traders.
This was just a quick introduction to the state of forex in 2017. If you’re serious about making money, then you should really take a more in depth forex course. My favorite is this one from Investoo. They’ll take you through everything you need to know about trading.
So are you ready to start making money trading forex? Here is how to get started:
- Go ahead and grab yourself a practice account so you can familiarize yourself with all the different forex jargon.
- Start reading the daily forex updates for etoro. When you join etoro they’ll be emailed to you. Alternatively bookmark fxstreet and make it your morning reading.
- Copytrade. You’ll learn why gurus make trades and this will help you with your own trades
- Open practice trades. Even if you don’t open any actual trades, login to your broker and keep and eye on the markets. But most importantly do open trades, and develop your own strategy.